Pan European real estate equities started the month very much continuing the late May theme of benefiting from the rotation away from growth focused (and more expensive) stocks towards the ‘value’ (cheaper multiples) names. However mid month that macro tailwind petered out and the sector corrected almost -7% in 5 days, this was followed by an equally sharp but short lived rally with the sector ending the month just +1.8% having been +9% at one point. ‘Volatile’ remains the most commonly used adjective. In essence markets are constantly torn between the attraction of equity valuations when bond yields are set to remain very flat for long periods (and real rates are negative) and the daily news that much of the real economy is in dire straits. The consumer (beyond the immediate post lockdown spending spree) is unlikely to come to the rescue given expected rising unemployment levels and job insecurity leading to higher savings ratios.
The Trust’s NAV with income rose +2.35% versus +1.85% for the benchmark, however the share price return was -4.3% as the discount widened to an attractive 14%. Geographically, the UK (-0.4% in GBP) had a poor month with investors taking fright over the Government’s handling of the crisis as well as the realisation that the looming Brexit negotiations begets more uncertainty. Sterling reacted poorly down -4% from the end of April highs against the Euro and investors sold the large cap diversified names hard with Landsec -8.7% and British Land -5.1%. In previous months both names suffered from their retail ownership but investors have a new worry – the risk to the demand for office space. Whilst the Covid working environment will result in more remote working (from home or decentralised locations) it will also require a significant reduction in the density of occupation in the workplace. The ultimate dominance of one of these opposing forces will determine the outlook for offices. The result will of course be far more nuanced but we believe developers with the skills to buy the right sites from nervous sellers will still deliver good returns even in a subdued market. Both Derwent London (-5.6%) and Great Portland (-2.9%) are close to their March lows but have record low levels of leverage and hence firepower to deploy.
Retail stocks were mixed with some enjoying considerable respite after the gruelling collapse in prices since February. Hammerson ended +9% having been up as much as 90% intra-day, this followed the announcement of the retirement of the CEO as well as news that a South African activist had built a large stake. NewRiver +17.6% and RDI +20.1% both enjoyed the bounce in the most distressed end of the sector. However the London retail specialists, Shaftesbury -15.9% and Capco -10.6% suffered as the return to profitability for many hospitality businesses looks even more distant than previously thought.
In Europe, it was a similar story with retail names enjoying a rally and the weakest enjoyed the most significant moves; Vastned + 10.5%, Wereldhave +7.4%%, Carmila +9.3% and Unibail +5.2%. Sweden and Norway were amongst the weakest regions in the month and very much formed part of the narrative of previous winners suffering a corrective bout. Balder returned -7.7% giving up 1/3 of its 12 month return and Fabege saw -4.5% as investors once again began nervous about office rental growth. The strongest performance came from SBB at +27% which saw the stock continue its meteoric rally from the mid May lows (when its CEO was briefly arrested on charges of insider dealing which were subsequently dropped). The stock has rallied +68% from mid May.
The Swiss names, dominated by SPS and PSP Swiss continued to be weak, both around -2%. The relative underperformance against the wider group reflects a correction following a sustained period of strength into the annual dividend payments at the end of Q1.
The AGM on 28th July is a closed meeting due to the CV-19 crisis. In lieu of the manager’s update normally given as part of that meeting, he has recorded a webcast where he reviews the year to March 2020 and discusses positioning of the Trust in these volatile times, available at https://www.trproperty.com/july-2020-agm-presentation/.
Discrete rolling annual performance as at 30.06.2020 (%):
Past performance should not be seen as an indication of future performance